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HMRC consultation issued on 28 December 2015 reveals Stamp Duty Land Tax (SDLT) increases for additional properties will catch all let-to-buys but not all buy-to-lets.

The consultation follows the announcements made in the 2015 Autumn statement to charge 3% higher rates of SDLT on purchases of additional residential properties such as buy-to-lets and second homes. Properties worth less than £40,000 are excluded from the higher rates.

When will the higher rates of SDLT apply?

A new two stage test has been introduced to determine whether the higher rates of SDLT will apply.

The first stage is whether two or more properties are owned after the new property has been purchased. If there is just one property then the purchase will not be subject to the higher rates of SDLT regardless of what the property is being used for. If there is more than one property then the next stage of test needs to be applied.

The second stage is whether the property being purchased replaces the main residence which is being sold. If it does not then the transaction will be subject to the higher rates of SDLT. If it does then the transaction is not subject to the higher rates of SDLT. However, where the previous main residence has not been sold before the purchase of the new property, the transaction will be subject to the higher rates of SDLT and a refund can be reclaimed if the previous main residence is sold within 18 months.

How will these changes affect let-to-buy investors?

The higher rates of SDLT will apply to these purchases. This is because the equity released from the existing main residence which will be let out, will be used to purchase a new main residence property.

Therefore, the individual will meet the first requirement of the test as they will have two properties when the new property is purchased and they will also meet the second requirements of the test because they have not sold the previous main residence property.

How will these changes affect buy-to-let investors?

The changes will affect most buy-to-let investors, as in most situations they will meet the requirements of the first stage of the test by owning two or more properties after the new property is purchased and they will meet the requirements of the second stage of the test because the new property will not be replacing the main residence. However, there are situations where the changes will not impact them, such as:

where a sole buy-to-let property is sold and replaced with another buy-to-let property as this will not meet the requirements of the first stage of the test

where an investor holds more than two properties when the new property is purchased but is selling their main residence to buy a new main residence as this will not meet the requirements of the second stage of the test.

When will the higher rates of SDLT apply from?

The higher rates of SDLT will only apply to purchases of additional residential property which complete on or after 1 April 2016. The higher rates of SDLT will not apply to contracts which were exchanged on or before 25 November 2015 but complete after 1 April 2016.

How will married couples be treated?

Married couples and civil partners living together will be treated as one unit. Therefore, they may own one main residence between them at any one time for the purposes of the test for the application of the higher rates of SDLT. Therefore, an individual buying a property may be liable for the higher rates of SDLT if their spouse or civil partner has an existing residential property.

Example

Mr and Mrs Smith are married. Mrs Smith owns a home which she purchased before they were married and which they live in as their main residence. Mr Smith buys a property to rent out. As they will own more than one residential property when the new home is purchased and they are not replacing their main residence, the higher rates of SDLT will apply.

Married couples and civil partners must be separated by a court order or by a formal Deed of Separation executed under seal otherwise they will continue to be treated as one unit for the purposes of the higher rates of SDLT.

How will joint purchasers be treated?

If any of the joint purchasers has two or more properties after the new property is purchased and is not replacing a main residence, the higher rates of SDLT will apply.

Example

Miss James who is a first time buyer and Mr Rogers buy a property together which will be their main residence. Mr Rogers already has a property which he decides to rent out. As Mr Rogers is not replacing his current main residence with the new property the higher rates of SDLT will apply to the property purchase.

How will parents purchasing a property for their children be treated?

It depends on who will own the property. If the child will own the property and it is the child’s only residence then the higher rates of SDLT will not apply. However, if the parent owns the property and they have two or more properties after the new property is purchased and they are not selling their main residence, the higher rates of SDLT will apply.

How will the only or main residence be determined?

It will be based on fact rather than an election made by an individual. The factors HMRC will consider include:

where the individual and their family spend their time;

where the children go to school;

where the individual is registered to vote;

where the individual works;

the location and amount of furnishing and location of moveable possessions; and

the correspondence and registration addresses given to various organisations.

How will properties owned outside of England, Wales and Northern Ireland be treated?

Property owned globally will be used to determine whether a property purchased in England, Wales or Northern Ireland is an additional property.

Example

Mr Steven Morrison owns a property in Scotland which is his main residence. Mr Morrison decides to buy a property in Wales which he will use as his second home. As Mr Morrison has two properties after the new property is purchased and he has not sold his main residence, the higher rates of SDLT will apply.

How will inherited properties be treated?

Individuals will continue to not pay SDLT on properties they inherit. However, if they purchase an additional property, the property they inherited will be used to determine whether or not their main residence is being replaced and how many properties they have after the new property is purchased.

How will caravans, mobile homes and houseboat purchases be treated?

The higher rates of SDLT will not apply to these purchases.

How will purchases of non-residential property be treated?

The higher rates of SDLT will not apply to these properties, even if the property is later converted into residential property.

How will purchases made by registered social landlords and charities be treated?

The higher rates of SDLT will not apply to these purchases.

How will purchases made by large scale investors be treated?

The government is proposing an exemption from the higher rates of SDLT for these purchases. It is undecided whether an exemption should be given where an investor makes a bulk purchase of at least 15 properties in one transaction or whether an exemption is provided where an existing residential property portfolio is at least 15 at the time of the new property purchase.

How will purchases made by a company or collective investment vehicle be treated?

The first purchase of a residential property by a company or collective investment vehicle and any subsequent purchases would be subject to the higher rates of SDLT.

How will purchases made by trusts and settlements be treated?

The government does not want the higher rates of SDLT to apply to either the purchase of an individual beneficiary’s residence where no other property is owned by the individual or to the replacement of a beneficiary’s only or main residence. This is to ensure properties held in trust because of inheritance or the disability of the beneficiary are not disadvantaged. Subject to this proviso, the purchases of residential property made by trustees will depend on the type of trust as follows:

Bare Trusts

Purchases by trustees of bare trusts will be treated as if they were made by the beneficial owner. Therefore, purchases by trustees of residential property will consider the amount of properties owned by the beneficiary after the new property is purchased and whether the new property replaces the beneficiary’s main residence to determine whether the higher rates of SDLT will apply.

Life Interest or Interest in Possession Trusts

Beneficiaries with a life interest or interest in possession will be treated as owning interests in residential property owned by the trust. Therefore, purchases by trustees of residential property will consider the amount of properties owned by the beneficiary after the new property is purchased and whether the new property replaces the beneficiary’s main residence to determine whether the higher rates of SDLT will apply.

Beneficiaries with an interest in the remainder of the trust will not be treated as owning an interest in residential property owned by the trust. Therefore, purchases by trustees of residential property will be liable to the higher rates of SDLT.

Discretionary Trusts

Beneficiaries with a discretionary interest in the trust will not be treated as owning an interest in residential property owned by the trust. Therefore, purchases by trustees of residential property will be liable to the higher rates of SDLT on the first property the trustees purchase.

When will the changes come into force?

The consultation will run from 28 December to 1 February 2016. The government will then review the responses and finalise their proposals in the budget on 16 March 2016. The higher rates of SDLT will then apply from 1 April 2016.

The changes again emphasise the importance of obtaining advice to ensure clients understand how the changes will affect them before they make investment decisions.

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